You need to extract the file using your choice of extraction program. WinRAR is a great choice and you can get it at
http://www.rarlab.com/, or if you already have it make sure you have the latest version to view the files in the archive.
Select the file you want to extract (swkotor.exe in your case) and extract it to either your KOTOR folder itself and accept if it asks to overwrite, or extract it to my document or the likes and follow Monty Burns method of copying it into your KOTOR folder. Be sure to create a new folder inside your KOTOR folder and name it backup or the likes, and copy the original swkotor.exe file into that folder so if anything goes wrong you still have the original and can apply another patch.
Regards
a55m0nk